As much as homeowners carefully plan their budgets, sometimes life can present unexpected obstacles.
If you have seen a large increase in your expenses lately, and you are looking for a way to get back in control of your household expenditure, you could look into getting a second mortgage.
Read on to find out more about how second mortgages work and how they may help homeowners.
A second mortgage is a secured loan where the borrower’s home is used as security. They are for those who have a pre-existing mortgage and are looking to borrow more money against their home. Second mortgages are different to remortgaging, in that you are not replacing one mortgage product with another, you are simply taking out an additional loan. These are also commonly known as ‘homeowner loans’.
Please note: A second mortgage is not the same as a separate mortgage taken out to buy a second home. It refers to the amount of mortgage secured on just a single property.
If you are taking out a second mortgage and looking to sell your property, the proceeds from the sale will firstly go to paying off the first mortgage. When that is paid off, the leftover funds will go towards paying off your second mortgage. If you have any loan outstanding on your second mortgage, you will need to arrange to move it to a new mortgage.
When it comes to repayment methods with a secured loan, many lenders offer both fixed and variable interest rates, as well as repayment and interest only products.
Take a look at our Guide to Mortgage Types for more information on mortgage repayment methods.
If you are looking to put a second charge on your property, and you intend to live in there until the mortgage is paid off, then you may appreciate the assurance of a fixed interest rate. On the other hand, you might look to sell in a few years, then a variable rate of interest on your second mortgage may allow you to make smaller monthly payments some of the time. Of course, you must plan for rates to rise above expected when you are planning your new household budget.
Take a look at our Guide to Mortgage Arrears if you are facing difficulties in paying off your mortgage.
John and Claire took out a £300,000 mortgage and they currently have three years left on their fixed term deal. Within the last two years, the value of their home has increased. In order for them to leave their mortgage deal early, they will have to pay an early redemption charge of 5% of the mortgage’s value (so, £15,000).
They would like to borrow £25,000 in order to convert their loft into a new bedroom, to add even more value to their home.
If they chose to remortgage, they would have to pay £15,000 to exit the current deal and there is no guarantee they would get a good interest rate, in comparison to the deal they already have. If they choose to take out a second mortgage, however, the interest rate on this second charge will be higher, but they will have to pay far less than £15,000 to process the application.
John and Claire opted for a second mortgage with a fixed term of three years. When this period ends, in conjunction with their first mortgage, they can look again at remortgaging options.
If you are struggling to make your mortgage payments or want to borrow more money against your property to make home improvements, proper financial planning is crucial. Get in touch with an independent mortgage advisor as your first step. They can offer you a free quote and advice on mortgages.
My biggest concern was finding a mortgage with no strings attached. My options were clearly explained to me and I felt confident about the decision. Alice Silverman, Stoke-on-Trent
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATION EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
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